Court Ruling In Puerto Rico Bankruptcy Fans Revenue Bond Fears

CHICAGO (Reuters) – A decision this week by a U.S. Appeals Court in a lawsuit related to Puerto Rico’s bankruptcy raises concerns over the payment of municipal bonds backed by specific revenues during future Chapter 9 cases, Fitch Ratings said on Thursday.

The Boston-based First Circuit court on Tuesday determined that municipalities are not required to make payments on debt secured by special revenues while bankruptcy proceedings are ongoing, although municipalities can voluntarily opt to do so.

Creates - Uncertainty - Payment - Revenue - Obligations

creates uncertainty about full and timely payment of special revenue obligations during bankruptcy of the related municipality,” Fitch said.

The credit rating agency added that if the ruling stands, it could negatively affect ratings on certain bonds secured by utility, transportation and tax revenue.

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The appeals court affirmed a ruling by U.S. District Court Judge Laura Taylor Swain, who is overseeing the island’s bankruptcy, which was filed in 2017 in an effort to restructure about $120 billion of the U.S. commonwealth’s debt and pension obligations.

Swain had dismissed a lawsuit by insurance companies guaranteeing payments on defaulted Puerto Rico Highways and Transportation Authority bonds. The bond insurers claimed that payments on the debt...